BB&T-SunTrust merger signals more bank deals are coming

The announcement of the $66 billion merger of BB&T Corp. and SunTrust could spur a wave of combinations for large regional banks. As banks grow — and they need to grow to increase profits — regulatory costs increase, and mergers can be an effective way to lower expenses.

This the largest U.S. bank combination, by far, since the crisis days of 2008. Investors are already pleased with the deal — and thinking about which lenders could be next.

“The BB&T/SunTrust merger will open more eyes on the potential for more sizable bank M&A to occur,” Jefferies analyst Ken Usdin wrote in a note to clients in the wake of Thursday’s news. “Scale is the game here, as BBT/STI were both eventually going to cross into the $250B-$750B asset bucket.”

BB&T
BBT, +2.19%
of Winston-Salem, N.C., and SunTrust
STI, +8.13%
of Atlanta announced they would combine in an all-stock merger of equals, although BB&T’s shareholders will own about 57% of the combined holding company. The deal is expected to be completed during the fourth quarter.

Shares of BB&T were up as much as 6% in early trading Thursday, while shares of SunTrust rose as much as 13%. Both have come off their highs in midday trade.

Read: RBC lands advisory record with $66bn SunTrust-BB&T merger

Jefferies’s Usdin called the merger of BB&T and SunTrust “attractive” because earnings per share are expected to increase 13% per BB&T share in 2021 and 9% for SunTrust shares, based on current consensus estimates among analysts.

For large bank holding companies, regulatory scrutiny, including the intricacy of the Federal Reserve’s annual analysis of capital plans and failure contingency resolution plans, increases as they grow, leading to increased staffing and other costs. Another important asset-size threshold for banks is $50 billion. Federally insured depository institutions of that size or greater are required by the FDIC to file resolution plans, colloquially known as living wills.

BB&T was the 10th largest U.S. bank holding company as of Dec. 31, with $226 billion in assets, while SunTrust was the 11th largest, with $216 billion in assets. The combined company, whose name hasn’t been determined, would be the nation’s sixth largest, based on those figures. It will be based in Winston-Salem and be among the top three lenders by deposit market share in Florida, Georgia, North Carolina, South Carolina, Tennessee, Maryland, Virginia and West Virginia.

A similar deal was announced by TCF Financial
TCF, +0.04%
of Wayzata, Minn. ($23.7 billion in assets), and Chemical Financial
CHFC, +0.24%
of Midland, Mich. ($21.5 billion in assets), on Jan. 27.

“With the Chemical/TCF deal last week, the market was thinking this may work,” KBW analyst Vrian Klock said during a phone interview Thursday morning. “A lot of other banks in the range of $100 to $200 billion asset size may be thinking about this. This is the right thing to do, when you think about competing with the bigger banks that are putting so much investment into technology. If the franchises work well together, there are a lot of arguments in favor of deals like this.

Klock had a neutral rating on BB&T but an “outperform” rating for SunTrust before the deal eas announced.

Potential prey

We can’t predict which banks will merge, and one comforting reason is that banks aren’t in a crisis environment. Loan quality across the domestic industry remains very strong. But the regulatory burden has increased in the postcrisis environment, and the Federal Reserve’s recent change in policy curtails the continual rise in interest rates that was expected to fatten lending margins.

So it may be worthwhile to look at the large regional banks that have shown the lowest returns on equity in recent years. These banks arguably face greater pressures to merge and enjoy “cost synergies” similar to the ones that BB&T and SunTrust expect.

KBW Bank Index

The KBW Bank Index
BKX, -0.22%
is made up of 24 stocks of large money-center and regional U.S. bank holding companies.

Leaving out the “big four” banks (JPMorgan Chase
JPM, -1.86%
, Bank of America
BAC, -2.58%
, Citigroup
C, -2.46%
and Wells Fargo
WFC, -2.62%
), here are the 15 banks in the index that have had the lowest average return on common equity (ROCE) over the past five years, through 2018:

Company Ticker City Average ROCE – 5 years Total assets ($bil) Total return – 2019 through Feb. 6 Total return – 2018 Total return – 3 Years
New York Community Bancorp Inc. NYCB, -0.75% Westbury, N.Y. 5.80 $52 27.8% -23.2% -9.4%
People’s United Financial Inc. PBCT, +0.72% Bridgeport, Conn. 6.11 $48 17.2% -19.8% 32.3%
Citizens Financial Group Inc. CFG, +2.61% Providence, R. I 6.17 $161 17.2% -27.4% 85.8%
Zions Bancorporation N.A. ZION, +0.49% Salt Lake City 7.01 $69 20.2% -18.3% 135.5%
Regions Financial Corp. RF, +0.26% Birmingham, Ala. 7.58 $126 15.2% -20.6% 112.4%
Capital One Financial Corp. COF, -1.82% McLean, Va. 8.19 $373 6.0% -22.8% 34.2%
KeyCorp KEY, +2.06% Cleveland 9.11 $140 11.6% -24.6% 64.6%
SunTrust Banks Inc. STI, +8.13% Atlanta 9.25 $216 16.5% -19.8% 84.1%
Bank of New York Mellon Corp. BK, -0.90% New York 9.26 $363 11.7% -10.9% 60.6%
Comerica Inc. CMA, +4.92% Dallas 9.27 $71 15.9% -19.1% 143.3%
BB&T Corp. BBT, +2.19% Winston-Salem, N.C. 9.28 $226 12.0% -10.2% 65.6%
M&T Bank Corp. MTB, +1.55% Buffalo, N.Y. 9.33 $120 12.9% -14.6% 59.5%
PNC Financial Services Group Inc. PNC, -0.15% Pittsburgh 9.86 $382 5.7% -17.0% 57.6%
State Street Corp. STT, -1.10% Boston 10.66 $245 11.4% -34.0% 37.3%
Huntington Bancshares Inc. HBAN, +3.66% Columbus, Ohio 10.95 $109 12.2% -15.3% 70.3%
Source: FactSet

We left BB&T and SunTrust on the list, despite the merger announcement.

KBW Regional Banking Index

The KBW Regional Banking Index
KRX, +0.37%
consists of 50 relatively large regional banks that aren’t included in BKX. Here are the 15 banks in this index that have had the lowest average returns on common equity over the past five years:

Company Ticker City Average ROCE – 5 years Total assets ($bil) Total return – 2019 through Feb. 6 Total return – 2018 Total return – 3 Years Total Return – 5 Year
Investors Bancorp Inc. ISBC, +0.56% Short Hills, N.J. 5.45 $26 20.4% -22.8% 17.7% 41.3%
Umpqua Holdings Corp. UMPQ, +0.34% Portland, Ore. 6.24 $27 11.0% -20.3% 37.6% 23.6%
Sterling Bancorp STL, -0.41% Montebello, N.Y. 6.28 $31 19.3% -32.0% 40.9% 76.2%
Popular Inc. BPOP, +0.26% San Juan, P.R. 6.56 $48 13.9% 35.8% 128.7% 116.2%
Iberiabank Corp. IBKC, +0.13% Lafayette, La. 6.61 $31 17.3% -15.3% 70.3% 31.7%
Valley National Bancorp VLY, +0.10% Wayne, N.J. 6.99 $32 17.6% -17.8% 34.2% 34.5%
First Midwest Bancorp Inc. FMBI, -0.04% Chicago 7.11 $16 12.4% -15.9% 42.7% 52.1%
Hancock Whitney Corp. HWC, +0.61% Gulfport, Miss. 7.27 $28 18.4% -28.5% 87.9% 38.8%
F.N.B. Corp. FNB, +1.62% Pittsburgh 7.32 $33 19.2% -26.2% 8.0% 19.5%
Old National Bancorp ONB, +0.60% Evansville, Ind. 7.32 $20 8.1% -9.2% 63.7% 44.9%
Associated Banc-Corp ASB, +0.58% Green Bay, Wis. 7.34 $34 12.6% -20.2% 40.4% 54.3%
Provident Financial Services Inc. PFS, -0.40% Jersey City, N.J. 7.49 $10 14.0% -7.6% 64.1% 97.4%
Brookline Bancorp Inc. BRKL, +0.32% Boston 7.72 $7 12.1% -9.9% 60.7% 107.1%
United Bankshares Inc. UBSI, +0.58% Charleston, W.Va. 7.72 $19 16.6% -7.0% 18.8% 47.6%
Source:FactSet

Don’t miss: These 2 stocks you’ve never heard of are better ways to profit from Amazon’s growth

Create an email alert for Philip van Doorn’s Deep Dive columns here.

Providing critical information for the U.S. trading day. Subscribe to MarketWatch's free Need to Know newsletter. Sign up here.

Philip van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

We Want to Hear from You

Join the conversation

Comment
Related Topics Markets U.S. Stocks Mutual Funds Exchange Traded Funds

Quote References BBT +1.07 +2.19% STI +4.78 +8.13% TCF +0.01 +0.04% CHFC +0.11 +0.24% BKX -0.21 -0.22% JPM -1.93 -1.86% BAC -0.74 -2.58% C -1.57 -2.46% WFC -1.29 -2.62% NYCB -0.09 -0.75% PBCT +0.12 +0.72% CFG +0.90 +2.61% ZION +0.24 +0.49% RF +0.04 +0.26% COF -1.46 -1.82% KEY +0.34 +2.06% BK -0.47 -0.90% CMA +3.92 +4.92% MTB +2.51 +1.55% PNC -0.18 -0.15% STT -0.77 -1.10% HBAN +0.49 +3.66% KRX +0.38 +0.37% ISBC +0.07 +0.56% UMPQ +0.06 +0.34% STL -0.08 -0.41% BPOP +0.14 +0.26% IBKC +0.10 +0.13% VLY +0.01 +0.10% FMBI -0.01 -0.04% HWC +0.25 +0.61% FNB +0.19 +1.62% ONB +0.10 +0.60% ASB +0.13 +0.58% PFS -0.11 -0.40% BRKL +0.05 +0.32% UBSI +0.21 +0.58% Show all references
MarketWatch Partner Center
Most Popular Prominent Republican wants to take student-loan payments out of your paycheck If you own Apple, Amazon, Facebook or AMD, look out below The depressing reason rich people are now the fastest-growing segment of renters Think the stock market will rally once a U.S.-China trade deal is struck—think again, says one Wall Street vet Trump's State of the Union Will Push for Bipartisanship in Two Areas

Community Guidelines • FAQs

BACK TO TOP MarketWatch Site Index Topics Help Feedback Newsroom Roster Media Archive Premium Products Mobile Company Company Info Code of Conduct Corrections Advertising Media Kit Advertise Locally Reprints & Licensing Your Ad Choices   Dow Jones Network WSJ.com Barron’s Online BigCharts Virtual Stock Exchange Financial News London WSJ.com Small Business realtor.com Mansion Global

Copyright © 2019 MarketWatch, Inc. All rights reserved.

By using this site you agree to the Terms of Service, Privacy Policy, and Cookie Policy.

Download from the App Store Download from the Google Play Store Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.
Advanced Search
Stocks Columns Authors Topics

No results found

BB&T Corp. U.S.: NYSE: BBT $49.60 +1.07 (+2.19%)

Volume 14.8M
Open $51.01
High $51.50
Low $48.91
P/E Ratio 12.71
Div Yield 3.26
Market Cap 37.0B

SunTrust Banks Inc. U.S.: NYSE: STI $63.52 +4.78 (+8.13%)

Volume 15.9M
Open $65.69
High $66.21
Low $62.58
P/E Ratio 11.09
Div Yield 3.14
Market Cap 26.3B

TCF Financial Corp. U.S.: NYSE: TCF $22.69 +0.01 (+0.04%)

Volume 742.5K
Open $22.88
High $23.27
Low $22.64
P/E Ratio 13.03
Div Yield 2.63
Market Cap 3.7B

Chemical Financial Corp. U.S.: Nasdaq: CHFC $45.40 +0.11 (+0.24%)

Volume 254.1K
Open $45.53
High $46.38
Low $45.24
P/E Ratio 11.63
Div Yield 2.98
Market Cap 3.2B

PHLX/KBW Bank Index U.S.: Nasdaq: BKX 96.64 -0.21 (-0.22%)

Volume 0
Open 97.40
High 98.61
Low 96.40
P/E Ratio 0
Div Yield 0
Market Cap N/A

JPMorgan Chase & Co. U.S.: NYSE: JPM $101.81 -1.93 (-1.86%)

Volume 6.1M
Open $103.25
High $103.50
Low $101.44
P/E Ratio 11.37
Div Yield 3.13
Market Cap 345.0B

Bank of America Corp. U.S.: NYSE: BAC $27.99 -0.74 (-2.58%)

Volume 33.8M
Open $28.54
High $28.64
Low $27.90
P/E Ratio 10.75
Div Yield 2.14
Market Cap 277.8B

Citigroup Inc. U.S.: NYSE: C $62.32 -1.57 (-2.46%)

Volume 10.2M
Open $63.61
High $63.63
Low $61.91
P/E Ratio 9.38
Div Yield 2.87
Market Cap 151.3B

Wells Fargo & Co. U.S.: NYSE: WFC $47.93 -1.29 (-2.62%)

Volume 13.5M
Open $49.09
High $49.30
Low $47.80
P/E Ratio 11.24
Div Yield 3.74
Market Cap 225.5B

New York Community Bancorp Inc. U.S.: NYSE: NYCB $11.94 -0.09 (-0.75%)

Volume 2.3M
Open $12.10
High $12.15
Low $11.94
P/E Ratio 15.1
Div Yield 5.68
Market Cap 5.7B

People's United Financial Inc. U.S.: Nasdaq: PBCT $16.85 +0.12 (+0.72%)

Volume 2.0M
Open $16.79
High $17.06
Low $16.77
P/E Ratio 13.09
Div Yield 4.15
Market Cap 6.3B

Citizens Financial Group Inc. U.S.: NYSE: CFG $35.42 +0.90 (+2.61%)

Volume 5.7M
Open $35.02
High $36.02
Low $35.01
P/E Ratio 10.09
Div Yield 3.6
Market Cap 16.1B

Zions Bancorp N.A. U.S.: Nasdaq: ZION $49.22 +0.24 (+0.49%)

Leave a Reply

Your email address will not be published. Required fields are marked *

These stocks are seen as a good bet when interest rates fall

2019-03-30 22:35:46

Buy Mastek; target of Rs 660: HDFC Securities

2019-03-30 07:05:40

Here's Advertisement

Volume 1.8M
Open $49.67